PI: Back-up to the future
10 June 2013
8 January 2014
9 September 2013
17 January 2014
23 June 2014
5 August 2014
Changes to the way solicitors insure themselves are kicking in this year. Our peer panel surveys the new landscape
Q What can firms do to better manage the risks they face and what impact might this have on their professional indemnity (PI) record?
Ross Risby, partner, DAC Beachcroft: Since law firms increasingly run and measure themselves as businesses, the best solution to effective risk management is to express the consequences of uncontrolled risk in terms of impact on the bottom line.
People motivated by financial performance will not give sufficient weight to risk issues if they remain theoretical. A good example is obtaining and recording accurate data when opening matters, which can seem irritating at the time, but failure to do so can have disastrous consequences. If everyone understands how good risk behaviour benefits the firm they will comply and, provided the systems are right, the claims experience will improve too.
Eamon Mooney, partner, Kennedys: The cold reality is that firms can always do more to better manage their risks. However, there are a number of common issues that we see in the PI claims we work on which, if handled differently, might avoid claims being made in the first place.
Claims often arise when the client’s expectations have been neither met nor managed. Clear and regular communication is the key to limiting that. Law firms are pressured environments and fee-earners can feel client or time demands leading them to step outside their area of expertise and make mistakes. If that can be avoided and there are clear lines within a firm to refer particular issues to other specialists, everyone benefits.
Inadequate supervision remains an issue. It can often be the case that mistakes are made by junior or inexperienced lawyers that would have been nipped in the bud if proper supervision had occurred. Again, time pressures make this a challenging but important management issue.
None of the above is rocket science and none of it will prevent claims, but these steps do result in the soil being less fertile for claims. With premiums as high as they are, there are concrete financial reasons for firms to make risk control a priority.
Ben Hubble QC, 4 New Square: Embrace the outcomes-focused regulatory regime and concentrate on process and risk management.
Qualifying market insurers still report that most complaints and claims arise from process and management failures rather than poor legal advice. Firms need to focus on basics such as establishing the retainer properly, providing clear estimates on costs, managing a client’s expectations and avoiding delay. This will reduce claims over time and so improve a firm’s PI record. Not concentrating on these issues runs the risk of claims arising which, in turn, will adversely impact a firm’s PI record.
Paul Castellani, partner, RPC: Risk management should be central to a well-run law firm. While the regulators require risk to be monitored, assessed and mitigated, it also makes business sense to do so. A clear, documented and practical approach to risk across the firm can lead to better client service delivery and a stronger claims record.
On the client intake side, firms should not only focus on conflict avoidance and weeding out bad bill-payers, they should also scrutinise how prospective clients turned up on their doorsteps. For example, has there been a third-party referral or introduction that requires scrutiny, or the delivery of certain regulatory messages?
On the funding side, changes to no-win, no-fee agreements, the growth of third-party litigation funding and the introduction of damages-based agreements all present challenges for risk management and financial controls.
Q Colps and Cofas - help or hindrance, and why?
Risby: For well-managed firms, the outcomes-focused regulation regime is only a modest development from the systems that were in place under the old Code of Conduct.
For large firms that can afford to diversify roles, having a senior person resourced to review and assess compliance at a strategic as well as an operational level can strengthen the business. However, problems arise where diversification is not possible, since the decision-making roles of managing partner and finance director will not sit easily with the reporting duties of the compliance officers.
Mooney: I definitely see these as a help in managing the risks in the profession. The imposition of Colps and Cofas is, of course, an added management burden. However, the principle seems a good one.
The new regime imposes a system of internal regulation within each firm and the requirement to report back regularly to the SRA with details of regulatory breaches. Too few or too many breaches and the SRA will dig deeper. That should enable everyone to improve their game and the SRA to be more focused. That’s the theory - we shall see how it works in practice.
Hubble: A help, because it means law firms have to put risk and compliance at the centre of their practice. The regulatory world has changed and will continue in its current direction so firms (as with the bar) have no choice but to embrace the new approach.
There is evidence that having one person responsible for practice management issues, such as a Colp, is beneficial. A similar system introduced in New South Wales in 2004 is credited with a one-third reduction in claims and complaints in the following four years. As for Cofas, there is clear financial pressure on firms at present and this should help to avoid a repeat of the high-profile insolvencies the legal market has seen in recent years.
Castellani: Compliance officers’ duties are to ensure compliance with the firm’s legal and regulatory obligations, record all failures to comply and report material ones to the regulator. At first glance, this role appears to be part-watchdog and part-police officer, but that is far too negative a perspective - Colps and Cofas should be seen as key members of the firm’s management team, the nuclei around which can be built a new and improved structure for risk management and compliance.
In many ways, the function of Colps and Cofas mirrors the advisory role of the lawyer. In the same way that a solicitor will have in mind a client’s objectives in advising on the risks and benefits of a given course of action, the Colp and Cofa have the firm as their client and risk-avoidance as their objective.
Q What impact has the implementation of the Legal Services Act (LSA) had on how the profession is insured?
Risby: It’s too early to say. The historic single renewal date of 1 October means that to date there has been only one renewal since the act came into force in October 2011.
The long lead times in achieving authorisation faced by firms wishing to take advantage of ABSs are only now being overcome and this year’s renewals will offer the first real glimpse of how things are likely to shape up for ABSs and traditionally structured law firms. The removal of the common renewal date will allow a slow migration towards longer and more flexible insurance deals for those firms with strong relationships with established insurers and who wish to buy certainty.
Mooney: The impact of the LSA is a big evolutionary change rather than a revolutionary one.
The biggest change lies in the introduction of ABSs. While many firms are becoming ABSs, I suspect we will see a gradual change in the landscape. Firms are stepping into the shallow end and still have their armbands on. Very few will leap immediately into the deep end and completely overhaul the way they work.
Insurers are cautious, but not panicked. If firms become ABSs merely to allow experienced non-legally qualified fee-earners or practice managers to become partners, the risk profile will not change and insurers are likely to be relaxed.
The story will be different when the ABS has secured external capital or is a multidisciplinary practice. Insurance of the provision of legal services is onerous for insurers. They look at the risks carefully. When there is the involvement of an external backer that is looking for profit or other professionals who have different insurance issues and professional rules, I suspect insurers will be more invasive when examining the risk, the drivers behind the business, its systems and its approaches.
However, this just means that the way insurers look at the profession will change and does not necessarily mean one sector will be a better risk than another. After all, it may be that the involvement of an external capital provider will ensure that some firms become better managed and better risks.
If we look forward five years the legal world and its insurance issues will be totally different; but then if we were to look back 20 years, would we not say the same thing?
Hubble: At the moment the LSA has had little impact because a solicitor providing services under the ‘solicitor’ flag still requires and has the benefit of insurance under the minimum terms and conditions. However, that is likely to change as the number of ABSs grows.
First, such ABSs can be regulated by someone other than the SRA so you may find ABSs shopping around for different types of PI insurance. Second, there is likely to be an increase in businesses or networks offering non-reserved matters (such as employment and immigration) outside the ‘solicitor’ banner. These entities would then need a more diverse insurance package covering a range of activities.
Castellani: The act has three main effects on solicitors’ PI insurance. First, it provides a strong statutory foundation for the SRA’s decision-making when it makes rules for client financial protection. This allows for a more vigorous dialogue between regulator and regulated concerning how the profession should be insured.
Second, the act has unleashed the possibilities inherent in ABSs. Complex ABSs - where legal services are combined with other professional services - present profound challenges to the PI insurer, not to mention commercial opportunities. Key problem areas include defining the scope of lawyering for the purposes of cover and integrating the mandated minimum terms with other areas of cover.
The third main impact has been in the area of consumer redress, namely the Legal Ombudsman. The scheme has jurisdiction to award redress of up to £50,000 and unlimited bill-slashing powers. Changes to the scope of the minimum terms ensure that awards are insured properly as part of the client financial protection safety net.
Q What can firms expect from this year’s PI renewal season?
Risby: The replacement of the Assigned Risks Pool (ARP) by the Extended Indemnity Period may increase some insurers’ appetite for insuring the profession, although recent reports indicate that, of the major players, at least one is intent on increasing its market share while another may be withdrawing from the market.
Whether or not that results in greater market capacity, the failure in recent years of several unrated insurers should make those firms that have previously simply plumped for the cheapest renewal option think twice about accepting the lowest quote. Certainly, firms that can show they operate real and effective risk management systems face better prospects of achieving an affordable premium.
Mooney: The coming renewal season looks set to be an interesting one. The past few years have seen a big increase in the share of the market that is underwritten by unrated insurers. Cost pressures affect all firms and PI premiums are a big cost for any practice.
The ARP is disappearing and, with it, the justifiable complaint of insurers that their ARP contribution has meant that they have chosen not to insure bad risks and then have to pay to underwrite them in the ARP.
Will that have an effect on premiums? There are one or two new players in the market, but whether they will take up the slack from those who are not going to write as much this year is not known.
The reduction in the number of lender claims may have a positive impact on the well-managed conveyancing practices that are left. The collapse of a number of firms in the past year might make it even more difficult for those in financial hardship to secure good terms as insurers will not want to be left with an intervened or collapsed firm if they can avoid it.
But we will also see structural changes this year, with some firms taking the opportunity of taking policies for more than one year, as the common renewal date of 1 October finally ends.
Hubble: Firms can expect a difficult and nervous time.
First, in the past year a large number of post-credit crunch lender claims against conveyancing firms have finally come home to roost. This inevitably makes insurers nervous, particularly with regard to smaller high street practices.
Second, the demise of the ARP and the prospect of forced closure if a firm cannot obtain cover in the 90-day Extended Insurance Period from 1 October means the safety net for firms that cannot obtain PI insurance on the open market will be lost. Expect further mergers and consolidations in the market.
Castellani: The rules relating to the funding of the ARP will change this indemnity year. More insurers are likely to enter the market and existing insurers are likely to try to expand their market share.
There are also new broker entrants with exclusive insurer relationships. This creates a healthy environment for purchasers of PI insurance. We would expect the total premium pot to remain static compared with last year.
Paul Castellani was assisted in his responses by RPC legal director Graham Reid